Originally published by AxiTrader
Market Summary
The choice facing traders this morning as markets kick off in Asia is whether to focus on politics or economic stimulus.
I say that after the US stock market rally, US dollar recovery, and bond rate rises were disrupted Friday when news broke former NSA Michael Flynn had pleaded guilty and was cooperating with the Special Prosecutor.
Then of course over the weekend when markets were closed the Senate passed it's version of tax cut legislation 51-49. That means President Trump is now closing in on a big victory - as long as the House and Senate bulls can be reconciled. Which surely they can.
And in Europe key negotiations continue around Brexit and in particular the Irish border issue. While the US and its allies are conducting the biggest ever drill on the Korean Peninsula. Oh and did I mention that President Trump seems to have admitted in a Tweet that he knew Michael Flynn lied to the FBI?
Anyway back to Friday and US stocks swooned when the Flynn news broke before the BTD crowd came back into the market. Europe missed the BTD move and finished sharply lower with the DAX and CAC off more than 1%. But at the close the S&P 500 was 0.2% lower at 2,642, the Dow Jones Industrial Average was off 0.17% at 24,231 while the Nasdaq 100 dropped 0.43% to close at 6,337.
The washup is that after a wild 24 hours trade SPI traders took just 6 points off where prices closed Friday.
On forex markets the US dollar was having a good day before the Flynn news broke. It’s opened up much stronger this morning – especially against the yen with USD/JPY up 0.66% to 112.84. But it’s very thin in this first hour of trade for the week (NB wholeslae markets open at 5am Sydney, MT4 is 9am at present). Euro is currently 1.1863, pound is at 1.3450 and the Australian dollar is back below 76 cents at 0.7596. Algos buying on Senate tax news anyone? Looks like it.
On commodity markets the OPEC/Russia deal, and a nice little trendline, helped oil surge again Friday although prices failed to take out recent highs. WTI is at $58.36 and Brent is at $63.46. Copper is largely unchanged at $3.06 a pound but other base metals were bid Friday as concerns over Chinese shutdowns worry traders. Gold is at $1280 and iron ore looks like it’s had a big rise.
Looking at the week ahead there is no understatement to say that it is huge, with a capital H.
Here in Australia we get the RBA meeting, decision and governor's statement as well as the partials and then actual Q3 GDP. We also get retail sales, trade and housing finance.
Internationally Friday sees the release of US non-farm payrolls. But it’s a BIG week of releases before we get to that. As well as the RBA the BoC has its policy meeting and we have the Brexit talks and hopefully agreement on the Irish border. After Friday’s solid manufacturing PMI’s we get the reads on services and composite PMI’s across the globe tomorrow. And EU GDP will also be of interest along with German industrial production and Chinese foreign reserves this week.
Here's What I Picked Up (with a little more detail and a few charts)
International
- A smoking gun? Many have leapt on the President’s tweet over the weekend where he appears to have admitted he knew General Flynn lied to the FBI. His counsel has said it was his fault for a badly worded tweet – yeah right. But the other side of the aisle and Trump haters are all over this as a sign of complicity and some say the odds of impeachment have just risen materially. I have no way of knowing. But this is a big distraction from the passage of the Senates tax bill which was the tweet immediately preceding the FBI/Flynn one.
- This is important folks because the US economy is fairly surging and the political distractions have folks acting as though it is weak as they ignore solid growth, Fed intentions, and the stimulus of tax cuts. IF this is just another storm in a teacup we could see a sharp reversal of the US dollar weakness and bond market rally.
- And here is why – US GDP growth looks like it is accelerating in Q4. The Atlanta Feds GDPNow guesstimate of growth for the current quarter points to 3.5% growth up from the last estimate of 2.7%. Friday’s ISM release was the big driver of this increase. The NY Fed’s Nowcast of GDP sits at an incredible 3.93% at the moment. No that is not a typo.
Source: NY Fed
- And for those wondering what happens to the competing House and Senate tax bills, they go into conference where a committee reconciles the differences – or tries to – and generates a single bill which is acceptable to both houses. GOP Congressional leaders have said this process will be expedited and should be successful. Politically, and with the Russia probe maelstrom swarming around President Trump once again it seems to me that politically Congressional Republicans would be mad to miss this opportunity to ACTUALLY get something done.
- It’s a big day or two for EU and Brexit politics. As UK and EU negotiators move closer to a deal there remains outstanding issues and of particular note is where the customs border between the EU and the UK is going to be with regard to Ireland. EU President Donald Tusk has said the Irish will have the last say on where that border lies. Key here is that Theresa May’s government is propped up by the DUP which does not want the border to be the island of Ireland – which would mean effectively that Northern Ireland is the border. But the Irish are steadfast in saying they will not accept a “hard” border on the island. Which is the source of Tusks comments. No one wants a return of the troubles but this remains a sticking point and a risk to the negotiations moving to the next stage. As such it is a risk to sterling which rallied last week on hopes things were moving forward.
- There seems to have been a shift in Yemen. Former president Saleh has moved back toward the Saudi side. Something to watch for those interested in Middle East politics.
- And keep an eye on the War Games near North Korea. In what is said to be the largest ever military drill on the Korean Peninsula the US and its allies will simulate an attack on the rogue nation. What Kim jong-Un will do in retaliation to the war games is uncertain but the state-run KCNA news agency said over the weekend that “Should the Korean peninsula and the world be embroiled in the crucible of nuclear war because of the reckless nuclear war mania of the US, the US will have to accept full responsibility for it,” Bloomberg reports. US NSA HR McMaster said over the weekend that the race to stop the rogue nation getting that long range nuclear capability is running out of time.
- DATA FLOW: EU data Friday was solid. Manufacturing PMI’s were strong.
Australia
- The SPI had a wild ride Friday as the chart shows. A break down and recovery as it followed the moves in global stock markets during the night has left it down just 6 points anad with an uncertain outlook as we kick off the week. If I took all the Fibo levels, Bolly bands, and other indicators off the chart it would become clear that the SPI is in a broad range between 5920 and recent highs near 6050. Only a break of either side would really get things going.
- On the physical S&P/ASX 200 it looks like a fall below 5,950 could get things moving. Anyway here is the SPI 200.
- No one expects the RBA to move rates after tomorrows meeting. And it is stupid that the RBA board makes a decision the day before the release of the GDP data as they do each quarter. But what the governor says in his statement is going to be very important.
- But the question of when and how they will raise rates continues to be an interesting one for traders. The AFR this morning cites Westpac’s Bill Evans say that he “doubt(s) strongly that the [RBA] would be amenable to such 'advice'” like that given by Warwick McKibbin or the OECD last week that it needs to raise rates. And interestingly that argument to do nothing may have been given strength by the BIS overnight in a new paper on indebtedness and the impact on monetary policy. Unsurprisingly the organisation found an asymmetry in the efficacy of monetary policy where rate hikes can gain more traction than rate cuts in nations where households have high indebtedness. Sounds like Australia.
Forex
- The US dollar is stronger this morning on the back of the passage of the Senate bill. That makes perfect sense to me. But the question I have is whether or not its enough to forestall the bears who at every turn recently have come out of the woodwork to find a reason to sell US dollars. Of course that reason, if they want to take it, can be the Flynn/Russia investigation. All I’d say to that is US economy. It’s strong and looking more and more like with the added stimulus of tax cuts the Fed will need to increase rates four times next year. Ultimately this reality is likely to see the US dollar strengthen materially and for an extended period. The question is when.
- In EURUSD terms the answer to that question is fairly simple. It has to break either side of this current range which represents the recent high at 1.1958 or the 38.2% Fibonacci support, and last week’s low, at 1.1805. A break either way is likely to accelerate.
- USD/JPY looks like it has broken higher. I guess when you think about it the stronger US economy, solid bid in US equities and the mood of traders should be a positive for USD/JPY. Especially after the BoJ has muddied the water a little on whether or not they are really thinking of changing their approach and letting 10’s rise a little. It’s very thin early morning trade though so we’ll see how the day plays out.
- Sterling suffered a little on Brexit worries and the Aussie and kiwi are down this morning on the back of the stronger US dollar. I have to say I am an unabashed US dollar bull. My sense is the economy is doing well, the Fed is acting while other central banks are talking, the stimulatory impact of tax cuts is still to be factored into Fed calculations, and of course the result of these factors will be rising bond rates in the US. All of that is US dollar positive. Of course a soft Brexit, or hopes thereof, has helped the pound and the Aussie and kiwi have benefitted from selling fatigue in the past week or two. But structurally as we head into 2018 the US dollar is likely to return to strength.
- But before we worry about that we need to talk about the Canadian dollar's move Friday. WOW. Toward the end of last week I said in my video, and I think wrote here in this note, that I’d probably be selling USD/CAD again if it didn’t break up and through the recent high. That didn’t happen because of the swift move we saw on Friday after the Canadian employment data shot the lights out with a 79,500 gain in November and Canadian GDP was a small beat for Q3 at 1.7% annualised. Although that latter number is a big slowdown from the previous run rate of 4.3% the employment data and US dollar selling saw USD/CAD collapse to the bottom of the range. It’s at 1.2698 now – up 0.13% this morning.
Commodities
- OPEC and the Russians will be happy, and US shale oil won’t be disturbed after crude oil prices rose again on Friday as traders judged the efficacy of the continued agreement to be strong. That, a few comments from Saudi oil minister al-Falih the day before and a couple of important trendlines certainly helped push prices higher once again.
- Highlighting the faith in the efficacy of the OPEC/Russia compact where comments from both the head of Russia’s Lukoil and the Commissioner for the US oil industry. Vagit Alekperov CEO of Lukoil said, "OPEC and non-OPEC have for the first time created a mechanism which really controls a large chunk of production, which properly coordinates output and it works”. He added that there was still much work to be done bringing down inventories but the market would not overheat.
- In the US Reuters reports that Ryan Sitton, one of three commissioners on the Texas Railroad Commission which regulates the Texas oil industry said, “Now that it seems prices are looking to stabilise with this OPEC deal around $60 (per barrel), I think that's going to be a very nice price environment for folks around the state”. And this is important. OPEC knows what shale is up to. Any notions it doesn’t are frankly stupid and rude as Russian Energy Minister Alexander Novak said last week.
- Whatever the fundamental outlook though prices for Brent and WTI are at a tantalising juncture. As you can see in this WTI chart (Brent is similar) prices were unable to break the recent high and the wedge/trendline is coming up fast. A break, in either direction, would be decisive.
- Gold is stuck in this range. It’s had two volatile days in a row – butu a rough $1260/1300 range persists.
- Copper has held above the old downtrend line and actually bounce a little off it. It still looks biased lower but with other base metals surging Friday it rose too. Here’s the chart.
Have a great day's trading.